White House Takes Action on Student Loans; Executive Order Does Not Affect Nondischargeability of Student Loans in Bankruptcy

President Obama issued an executive order on June 9, 2014 intended to alleviate the burden on people struggling to repay student loans. Student loan debt and the cost of college have both grown at explosive rates in recent years, while the job market has remained comparatively stagnant. Defaulting on student loan debt can have devastating consequences, but unfortunately the White House’s executive order does not address many of the most pressing problems. Of course, there is only so much that an executive order can do, but it is important to note that the order only makes student loans, rather than college, more affordable. Most importantly, an executive order cannot modify or repeal the provisions of federal bankruptcy law that exclude student loan debt from discharge.

In the past 15 years, student debt has increased by over 500 percent, according to the Huffington Post. In roughly the same time period, average salaries for young people entering the job market have decreased by approximately 10 percent. People owe more coming out of school but have less opportunity to earn money to repay it. Over 40 million people currently hold student debt in the United States, an amount roughly equivalent to the entire population of California and Nevada. Of those people, an estimated seven million have defaulted on their loans.

President Obama’s executive order expands the “Pay As You Earn” program by directing the Department of Education (DOE) to cap payments on all federal student loans at 10 percent of the debtor’s income. It also directs the DOE to increase publicity for several existing repayment programs, which are intended to help debtors struggling with making payments before they default. The Income-Based Repayment plan, for example, adjusts monthly payments based on a debtor’s income and allows loan forgiveness under certain circumstances.

Regardless of the executive order and various DOE payment plans, student loans remain nondischargeable in bankruptcy except in cases of “undue hardship.” 11 U.S.C. § 523(a)(8). Most bankruptcy courts have adopted a three-part test to establish undue hardship, known as the Brunner test: (1) inability to maintain a “minimal standard of living” if forced to repay the loans, (2) likelihood that the conditions preventing repayment will persist for most of the repayment period, and (3) “good faith efforts” by the debtor to repay the loans. Brunner v. N.Y. State Higher Educ. Svcs., 831 F.2d 395, 396 (2d Cir. 1987). The Brunner test is difficult to pass.

The inability to discharge student loan debt in bankruptcy is only one of the many problems faced by debtors. Defaulting or falling behind on student loans can have significant and long-term consequences beyond damage to a person’s credit rating. Many employers conduct credit checks on job applicants, and some have shown hesitance to hire people with significant repayment problems. Some universities, at the encouragement of lenders, might withhold transcripts from graduates who have fallen behind on student loan payments. Some states, although not California, allow revocation of a professional license, or even a driver’s license, for defaulting on student loans. Non-payment of student loans, frequently caused by a lack of income, can therefore actually make it even more difficult to find a job.

The bankruptcy system can offer relief to people whose required debt payments exceed what they can pay from their available income. Bankruptcy attorney Devin Sawdayi has helped people in the Los Angeles area through the bankruptcy process for over 16 years. To schedule a free and confidential consultation to see how we can help you, please contact us today online or at (310) 475-939.